Refinance and lower your monthly mortgage payment | Singapore
‘Refinance’ refers to the process of paying out your current home loan by taking out a new loan, either with your existing bank or through a different bank.
In Singapore, the interest rate is usually low for the first few years. Rates can be fixed or variable. Most will revert to the standard rate after the lock in period. For example, if you have taken a home loan in the 1st Qth of 2011, you are likely to be paying 1.25%+SIBOR now. Given 3M SIBOR is 0.40% (1st business day of May 2014), your home loan will be about 1.65% now. If you chose to refinance, you may be about to get 1.252% (0.85%+SIBOR).
1. Lower your monthly repayment
Usually after the lock-in period, your interest rate will start to increase. To lower your monthly repayment, you can refinance to another bank with a better package or reprice with your existing bank.
To calculate the potential savings, lets assume an outstanding loan amount of $800,000, 25 years tenure at 1.65% p.a. The refinance rate will be 1.20% p.a for the first 3 years. Thereafter 1.65% p.a
2. Lower your interest rate
From the calculation, for a reduction of 0.45% p.a, the potential savings is about $6,055 in the first 3 years.
Refinancing to a home loan with a lower mortgage can immediately reduce your monthly payment and the amount of interest you pay. For more calculations, please use our free refinance calculator.
3. Pay off your mortgage faster
Your income has since improved when you first took out the mortgage. How about refinancing your loan from 25 years to 20 years? Doing so will increase your home equity and reduce the interest.
4. Change your variable interest package to a fixed interest mortgage
Perhaps the interest rate of your variable interest package has gone up every adjustment period and your are concerned the trend will continue. Why not refinance your loan to a fixed interest package? A fixed interest package will prevent you from being affected by rising interest rates and allow you to budget your payment with certainty.
5. Cash out on your home equity (Not applicable to HDB flats)
If you need cash to pay for your kids university expense, renovation, start a business or consolidate debt, or for any other reason. You can consider a home equity loan. This involves in getting a new mortgage in additional to what your currently owe. You must use cash to service the home equity loan, CPF is not allowed.
How to start your Refinance
1. Determine your current status
Before you begin your refinancing application, here’s some information you will need to find out.
- Outstanding loan
- Current interest rate
- Current monthly repayments
- End of redemption penalty/ legal claw back period
Tip: Even if your mortgage is within the redemption penalty period, it may pay to refinance if the savings is more than your costs, or if the new mortgage suits your lifestyle better.
2. Start your research
Now that you’ve the information ready, it’s time to start your research. You can begin by talking to individual banks about your current status, research on packages thru online refinance home loan comparison sites or get a mortgage broker to help you.
With the right tools, doing a home loan research can be easier than you think.
Tip: Watch the penalties and fees
Early Redemption Penalty
This refers to the penalty payable to your existing lender if you refinance to another lender within the lock in or commitment period. Typically the penalty is set at a predetermined rate peg to your housing loan. Some lenders will also have an administration fee.
Legal Claw back
If you had received a legal subsidy from your existing lender when you first took up the loan, you may need to pay back the legal subsidy should you refinance within the legal claw back period. The legal claw back period is typically 3 years.
When you move your home loan to another bank, you will need to pay conveyancing fees. Some banks will offer a legal subsidy to help you offset the fee. Valuation fee – depending on your property type and size, the valuation fee is about $400 or more.
When to refinance
Take a look at your letter of offer. Usually the lock in is 3 years from date of disbursement and you need to issue a 3 months advance notice to your existing bank. This means you can start to refinance on the 21st month.
3. Study the loan features
a) Floating vs. Fixed
Floating rates: Rates will follow movements in line with the reference rate. The reference rate may be determined by the banks or benchmarked against a publicly available indicator like SIBOR or SOR rates.
Fixed rates: A cautious way of borrowing money, this loan will follow a pre-determined (fixed) rate of interest for a given interval, e.g. one year, two years or three years. After the given interval, the interest rate becomes variable and works like a floating package.
c) Lock in vs. No Lock in
The lock in period is significant if you have intention to redeem (pay off) your home loan within a certain time period. For example, if you have plans to use the proceeds from the sale of your existing property to fully redeem your new home loan, you may consider a no lock-in mortgage or redeeming the home loan after the lock in period to avoid any penalties or fees.
4. Submit your application
After you have short-listed the mortgage packages, you can now submit your documents to banks for application.